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Rates drop, refis surge as Fed frets about economy

October 15th, 2010

The Federal Reserve filled headlines this week causing great speculation on the future of mortgage rates. Economic activity continues to slump. What impact does economic news have for you and your work with on-line mortgage calculators?

Fed concerned about lackluster economy

In minutes released earlier this week from its Open Market meeting earlier in the month and in a speech by Federal Reserve Chairman Ben Bernanke it is clear the Federal Reserve Governors are increasingly concerned about the lagging pace of economic activity. Citing concerns that economic growth is not strong enough to sustain job creation and that inflation is running below the target level of 2 percent, the Fed has once again announced it may go on a buying spree. Looking to use the power of its check book and balance sheet to spur spending and investment, if economic growth does not accelerate soon the Fed will step up its purchase of government debt.

With long term rates (including mortgage rates) at historic lows there are few options for the Federal Reserve to spur economic growth and investment. As you use refinance calculators to determine your monthly mortgage savings consider that rates are at all-time lows. The Fed is playing a balancing act between trying to keep rates low to stimulate growth and not creating an environment that stimulates deflation instead. Take advantage of historically low mortgage rates today.

Consumer prices and inflation remain flat

Retailers were happier in September as retail sales increased 0.6 percent from August’s sales. But the increased buying activity for cars, electronics and appliances did not translate into higher prices. The Consumer Price Index, the main gauge of inflation, was flat for the month from August when food and energy were stripped out. Year over year prices have only increased 1.1 percent, and only 0.8 percent with food and energy taken out.

However, while consumer prices remain flat, prices paid by manufacturers have increased with the Producer Price Index increasing 4 percent from September 2009 to September 2010. This gap between wholesale and consumer prices indicates pressure on labor markets as producers see higher prices on their delivery docks but no price increases at their cash registers; this imbalance shrinks profits.

Rates drop to lowest yet, refis surge

Homeowners took advantage of the lowest rates on record from Freddie Mac, converting refinance calculator results to refinance applications at a steady clip according to the Mortgage Bankers Association. In its Weekly Applications Survey, the MBA reported that refinance applications for the week ending October 8th were 21 percent higher than the prior week. Refinances composed 83 percent of the total application index, the highest percentage since January 2009. Following an increase in purchase applications the prior week led by government applications from those looking to avoid increases in FHA mortgage insurance premiums that went into effect October 4th, the purchase index declined 8.5 percent for the week.

Freddie Mac posted yet another low in its Weekly Primary Mortgage Market Survey. The 30 year fixed rate at a cost of 0.7 origination points was 4.19 percent for the week ending October 14th. The Freddie Mac high for 2010 was the week of April 8th at 5.21 percent. If you have been using a prequalification calculator to determine your purchasing power for a new home loan, your purchasing power has increased significantly since the Spring with a drop in mortgage rates in excess of 1 percent.

What next?

Prices are flat, jobless claims still continue to exceed 450,000 every week and the Fed appears constrained as to what it can do to stimulate the economy. Washington is closed until after the elections and businesses and consumers sit on cash and continue to save as they consider “what next?” All these impact mortgage rates and create expectations for rates to stay low for the near term. If you are considering purchasing a new home or refinancing your existing mortgage do not miss this opportunity to lock in a low mortgage rate. Use the on-line mortgage calculators to determine your financial future.